Thursday, September 24, 2009

HUD Announces Major Change to Reverse Mortgages

To keep the program from needing a bailout in the future, HUD is acting quickly to lower the maximum principal limits by 10%.


On September 23, 2009, the U.S. Department of Housing and Urban Development posted Mortgagee Letter 09-43, which announced a new set of principal limit factors for the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) program. The changes will lower the principal limits for the HECM by 10%.

According to the ML, the new principal limit factors must be used for all HECMs where the FHA case number is assigned on or after October 1, 2009.

So, all loans that currently have a case number or where one can be obtained prior to October 1, may be processed as usual. 

What caused this sudden change?

It seems the HECM program, seemingly like everything else in this country, is in danger of needing a bailout in the future. This was brought to the attention of Congress when an estimated subsidy of $798 million appeared in President Obama’s fiscal 2010 budget. This was the first time in the history of the program that any subsidy had ever been requested. Both the Senate and the House responded quickly, passing bills requiring HUD to adjust the program to avoid requiring any subsidy from the government. As of yet, the Senate and House have not reached a compromise on the differences in their bills, but HUD’s surprise announcement shows they expect it to happen soon.

What caused the subsidy request? Several factors are affecting the stability of the HECM program:

 The continued drop in home prices is causing higher losses when HUD takes a property back after the demise of a borrower and has to sell the property to recapture the loan proceeds.

 Defaults are rising due to unpaid property taxes and home insurance.

 Record numbers of seniors are flocking to HECM’s due to financial distress and lenders ramping up their marketing of the program. Congress suspended the cap on the number of HECM’s HUD was authorized to insure back in 2006.

 Fraud continues to increase causing higher losses.

Industry experts estimate that if the new loan limit had been applied to current HECM’s already in place, nearly 21% of seniors would not have had enough funds to cover their debts – meaning theywouldn’t have been gotten their loans.

HUD’s also been discussing changes in the HECM program to address the property tax and insurance issue. They may require lenders to document that seniors have the ability to pay these items. If they don’t, additional proceeds may be affected to avoid these types of defaults.

So, if you know of anyone thinking of getting a reverse mortgage, tell them to apply ASAP before the new limits kick in.

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